The rupee has fallen 5.2% in the current financial year, from
close to 65 on March 28 to an 18-month low of 68.42 against the dollar
on Wednesday. As worries for importers, travellers and even students
rise steadily, analysts are watching the currency’s steady march towards the
70-mark as international crude oil prices continue to rally and foreign
funds flow out.
Why has the rupee been falling?
There are three major reasons. The rise in crude prices,
portfolio outflows from India due to the selling of stocks, especially
by foreign portfolio investors (FPIs), and a growing anticipation of interest
rates rising in the US.
Brent crude prices have increased from $70.30 to over $80
per barrel since the beginning of the new financial year in April. This is
mainly due to concerns over supply disruptions after the rise in US tensions
with Iran, which contributes 11-12% of OPEC production. As oil prices rise,
India’s trade deficit — excess of imports over exports — will worsen,
which can in turn impact the current account deficit.
Expecting US interest rates to go up, FPIs have taken out Rs 27,000
crore from India in April and May so far, which is over $4 billion in less
than two months. As the US Federal Reserve raises rates further — which is
bound to happen — FPIs will prefer to invest in their home country as
the arbitrage gain while investing in India and emerging markets will decline.
A weakening rupee will also lower returns, which will in turn impact
future inflows.
What does this mean for imports?
Importers will be hit as the cost of getting goods or equipment
into India will increase. When the rupee weakens, importers, especially oil
companies and other import-intensive companies, have to shell out more
rupees to buy an equivalent amount of dollars. In this sense, a weak
rupee can act as a kind of import tax. For the oil sector, it is a double
whammy, as the rise in crude prices and the decline in rupee value add to
retail fuel prices. Margins of oil companies will come under pressure.
And what about exports, then?
Exporters, especially software exporters, stand to benefit, as
they get more rupees while converting dollar export earnings into Indian
currency. This is expected to boost exports, which have been showing
single-digit growth. In FY18, exports grew 9.78%, and given exports in April
2018 showed only 5.17% growth, it appears that the issues with GST
implementation are yet to be overcome. The twin impact of FII outflows and
worsening trade balance can hit the rupee further; to keep external metrics
stable, therefore, exports of both services and merchandise need a further push.
So how is this situation affecting the overall economy?
The fiscal and current account deficits are interlinked. When
fiscal deficit is high, government borrowing rises, leading to higher interest
rates. However, when foreign funds start flowing in, the rupee strengthens
and exports become more expensive. Crude prices are expected to rise further
this year, and imports are expected to grow by at least 14%, says a note from
SBI Research. This is bound to enlarge the import bill and push up the trade
deficit, which will in turn add to the CAD and push the FY19 figure
to 2.5% of GDP. A widening CAD has macroeconomic implications. The best way to
bridge the gap is by boosting inflows, but Indian markets have been
witnessing FPI outflows, instead. Also, the rise in import costs as a result
of a weak rupee can boost inflationary pressures.
Is the middle class affected as well?
A weak rupee is making overseas travel costlier this holiday season
— a traveller will have to shell out more rupees to buy dollars. Students studying
abroad too will see their costs rise. In 2017-18, Indian travellers spent
$4 billion abroad; students spent $2 billion.
But these are good times for those who receive remittances from
abroad. According to the World Bank, the Indian diaspora remitted about $69
billion in 2017, the most in the world. The value of these remittances in bank
accounts in India rises as the rupee depreciates against the dollar. If
non-resident Indians or their families were to receive an amount similar to
2017 this year, and if the rupee were to continue to trade at the current
exchange rate, it would translate into an extra $3.5 billion.
How desirable is it then, to have the rupee “as strong as the
dollar”?
On August 20, 2013, when the rupee fell by 98 paise to 64.11 in a
day,
Narendra Modi,
who was then the Chief Minister of Gujarat, said, “If the rupee keeps falling
like this, other countries will start taking advantage of India.” Politicians
have on several occasions spoken of the need for a stronger rupee. The
currency’s
fall and rise can be both negative and positive, depending on the macroeconomic
situation,
inflows, crude prices, strength against other currencies,
real effective exchange value, etc. A
strong rupee can hurt exports, but
a weak rupee can push up the import bill.
So, what is the ideal value of the rupee against the dollar?
It’s difficult to say. The RBI, which manages the rupee’s movement,
says that it never fixes a value; rather, it facilitates the orderly movement
of the currency. The RBI buys dollars from the market when the rupee
strengthens, and sells the US currency when the rupee weakens. It tries to
maintain a balance by taking into account all external and internal factors.
India’s foreign currency assets fell by around $6 billion to around $394
billion recently as the RBI apparently sold dollars from its foreign
exchange kitty to stabilise the currency. With the markets witnessing
foreign outflows in April and May, the RBI recently took several measures to
attract more capital flows. It enhanced investment limits, relaxed rules
for foreign investors, and revised the minimum residual maturity requirement
and cap on aggregate FPI investments in central government securities.
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